Risk in Emerging Markets

The Hidden Risks in Emerging Markets

88 Harvard Business Review April 2010

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Witold J. Henisz (henisz@ wharton.upenn.edu) is a professor at the Wharton School at the University of Pennsylvania in Philadelphia.

Bennet A. Zelner (bzelner@duke.edu) is a professor at Duke University’s Fuqua School of Business in Durham, North Carolina.

ILLUSTRATION: GUY BILLOUT

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ommunications and game theory overnments from y Witold J. Henisz

come more pronounced as discussions about the WHEN A FIRM with a value-generating technological or managerial capability invests abroad, its share- appropriate near-term policy response to the crisis give way to debates about who should pay and how holders and the host country’s citizens both stand to benefit. But no matter how good the apparent fit be- much. Politicians will struggle to balance popular tween what foreign companies offer and what host demands to punish those perceived as responsible countries need, success is far from assured. Elec- against fears of stymied innovation and the flight of human and financial capital. Broader domestic tions and other political events, economic crises, and economic concerns—for example, protectionist senchanging societal attitudes can disrupt the best-laid plans in both emerging and advanced economies. timent in response to the realignment of economic power in favor of emerging nations such as China The interplay of these forces—and the implications and India—will inevitably affect the debate as well. for the political choices that multinational firms The multinational firms best able to anticipate and make—will become especially prominent as national governments chart an uncertain course toward stabi- manage the related risks and opportunities will have the strongest competitive edge. lization following the global financial meltdown. Historically, the biggest risks faced by foreign inIssues such as taxation of executive compensavestors were in developing countries...